2007 Year-End Health Savings Account Strategies

A Health Savings Account can be an important part of your
tax and money-management strategy. Not only can you reduce your health
insurance premiums, but when you fund your account you get a nice tax break. If
you stay healthy, that money grows tax-deferred like an IRA, and can amount to
a lot of money in retirement.

 

Every year around this time you should assess your finances
and see what you need to do to optimize your situation. Making the most of your
Health Savings Account (HAS) is
one area that can really make a difference. Here are the key things you need to
know to get the greatest tax reduction and the most growth out of your HSA.

 

Maximizing Your
Contribution May Reduce Your Taxes By $1836 or More

 

If you own an HSA-qualified health insurance plan that has
an effective date no later than December 31, 2007, you qualify to make a tax deductible
contribution to your Health Savings Account. 
This will immediately reduce your tax bill come April 15.

 

The contribution limit is not pro-rated based on the number
of months in 2007 in which you had coverage, as it was in the past.  However, you do need to remain an
HSA-eligible individual throughout 2008, or the extra amount contributed will
be counted as income and subject to an additional 10 percent tax.

 

The maximum HSA contribution in 2007 is $5650 for families,
and $2850 for individuals.  If you are 55
or older, you may also contribute an additional $800.

 

Your HSA contribution is deductible on your federal income
taxes, and every state (except AL, CA, NJ, and WI) also gives a deduction on
state income taxes.  So by maximizing
their HSA contribution
a family in a 28 percent tax bracket, paying 4.5 percent state income taxes,
will reduce their April 15 tax burden by $1836.25.

 

Though your HSA-qualified health insurance must be in place
before the end of the year, you do have until April 15 to make your 2007
contribution.  Though you cannot put any
more 2007 money in if you miss this deadline, you can reimburse yourself in
later years for qualified expenses incurred in 2007, even if you do not
currently have the money in your account.

 

Strategic Withdrawals

 

You can withdraw money from your HSA at any time to pay
qualified medical expenses.  Keep in mind
that this includes over-the-counter medications such as aspirin or cough syrup,
dental and vision expenses, and even alternative care such as acupuncture or
homeopathy.

 

One strategy that many of our members take is to save their
medical receipts, but to delay reimbursement from the HSA so that the funds
have the opportunity to grow tax-deferred. 
There is no time limit in which you must withdraw the money.  Since most people will face larger medical
bills during their retirement, it is quite likely that the withdrawals would
never be subject to taxes.

 

If you are not fully funding your Roth, another strategy
would be to reimburse yourself for medical expenses from your HSA, and to
deposit it in your Roth.  Your HSA
reimbursement is tax-free, and placing it in your Roth would also give you
tax-free growth while enabling you to withdraw the money in retirement tax-free
for any reason, including non-medical expenses. 
You would also avoid any extra state taxes in the states that currently
tax Health Savings Accounts.

 

Remember to Keep Good
Records

 

You should keep a record of any qualified medical expenses
you incur.  This will ensure that you
have documentation substantiating any tax-free withdrawal you make from your
HSA.  In order to pay for a medical
expense from your HSA, it must be a qualified expense.

 

You can go low-tech and just put receipts in a file, or get
a little more organized and track your records online. 

 

2008 Contribution
Limit and Deductible Changes

 

In 2008 the maximum annual HSA contribution limit will again
go up, this time to $2900 for individuals and $5800 for families.  Those over age 55 will be allowed to contribute
an additional $900 to their accounts.

 

The maximum deductibles will be going up next year to $5600
for individuals, and $11,200 for families. 
If you’ve now got some money socked away in your HSA, it might make
sense to move to a higher deductible to further reduce your premiums.

 

Health Reimbursement
Arrangements

 

If you are currently set up as an S-corp, you should
strongly consider setting up a Health Reimbursement
Arrangement (HRA)
.  An HRA enables
your S-corp to reimburse you as a tax-free fringe benefit for the cost of your
individual health insurance.  This is the
only way an S-corp can legally pay for individual health insurance, and is
saving our average S-corp member over $3000. 
The HRA must be established by December 31st in order to take advantage
of it in 2007.

 

It may also be beneficial to set up an HRA if you have a
spouse who works in your business.  Also,
many small businesses use an HRA to reimburse their employees for individual
health insurance premiums (which is much less expensive than getting group
coverage).  More information and a simple
online application is available on our Health Reimbursement Arrangement page.

 

What to Do Now

 

Here are the steps you should take now:

 

 

Through HSAs and HRAs, individuals who pay for their own
health insurance have some powerful tax reduction strategies at their
disposal.  December 31st is
the deadline for obtaining 2007 tax deductionsFeature Articles, so you should act quickly if
these ideas make sense for your situation.

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